Top Banker Explains Mortgage Meltdown, Foreclosures : Real ...

Profits were up at JP Morgan Chase in 2011, but no less important candor continues on a high level.

In his 2011 annual letter to shareholders, Chairman and Chief Executive Officer Jamie Dimon looks at the mortgage crisis, explains what went wrong and how Chase got involved.

JP Morgan Chase, it should be said, did the country a favor by absorbing Washington Mutual and with it billions in new liabilities. It did not originate toxic loans such as option ARMs. It ended relationship with mortgage bankers.

?Some of whom,? says Dimon, ?underwrote the worst of the mortgages and probably missold mortgages more than most.?

JP Morgan Chase is now our largest bank holding company.?It has an enormous impact on mortgages, mortgage rates, home equity lines of credit and foreclosures as well as FHA, VA and conventional financing.

What Mr. Dimon has to say ? whether one agrees or not ? is important. Below are some of Dimon?s comments from his 2011 annual statement.

?Many of the financial crises of the past hundred years around the world were related to real estate. Real estate was not the only culprit in the recent crisis, but it certainly was at the eye of the storm. I suspect that the mortgage crisis will be the worst financial catastrophe of our lifetime. What the world experienced was almost a collective brain freeze ? traditional mortgage underwriting loosened over time (actively supported by the U.S. government) such that we got Alt-A mortgages, subprime mortgages and option-adjustable rate mortgages (option-ARM).

?These mortgages were packaged into securities (sometimes guaranteed by government entities and insurance companies), and home ownership was going up ?- it all seemed to be working. But as the process unfolded, unscrupulous mortgage officers were mis-selling mortgages, some borrowers were lying on mortgage documents and speculation was rampant. It was a disaster hidden by rising home prices and false expectations, and once that price?bubble burst, we all were in trouble. (Emphasis mine)

?We need to write a letter to the next generation that says, ?Never forget: 80% loan to value and verify appropriate income.

Clearly, it was not our finest hour

?We were one of the better actors in this situation ? but not good enough; we made too many mistakes. We generally were a better underwriter. We did not originate option-ARMs. Many of our problems were inherited from Bear Stearns and WaMu. Even our subprime mortgages outperformed most other subprime mortgages. Early in the crisis, we also stopped dealing with mortgage brokers, some of whom underwrote the worst of the mortgages and probably mis-sold mortgages more than most.

?But we did participate in this disaster by originating mortgages that wouldn?t have been given a decade earlier (and won?t be given a decade later). ?(Emphasis mine)

?And when delinquencies and foreclosures grew dramatically, we were ill-prepared operationally to deal with the extraordinary volume of troubled mort-gages and upset borrowers. Our servicing operations left a lot to be desired: There were too many paperwork errors, including affidavits that were improperly signed because the signers did not have personal knowledge about what was in the affidavits but, instead, relied on the company?s processes. However, the information in the affidavits was largely accurate ? i.e., the borrower, in fact, was in default, we did have the mortgage and so on.?

(Comment:?How do we know which affidavits were ?accurate? and which were just ?largely accurate.? What?s the difference between largely accurate?and simply wrong? How many wrongful foreclosures were there, if any? How would anyone feel if they unfairly lost their home?)

?Gearing up to deal with this problem meant overcoming the multiple and poor systems we inherited from our acquisitions of Bear Stearns and WaMu. In addition, there were numerous government modification and refinancing programs and multiple changes to these programs to contend with, some of which involved extensive and hard-to-complete paperwork. We now have 23,000 people servicing delinquent loans or dealing with foreclosures ? up from 6,800 people in 2008.

?These problems, as one might expect, led to a myriad of lawsuits from various U.S. government agencies, attorneys general from the 50 states and private investors.?

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